Pro-Growth Tax Reform Is Not "Wealth-Fare," Senator Schumer

The GOP has offered an outline [of tax reform] that will enhance U.S. competitiveness and simplify the code—if the final product isn’t diluted by the class-warfare brigades and K Street lobbyists.

--the Editorial Board of the Wall Street Journal

Senator Chuck Schumer already has blasted GOP proposals for tax reform as "wealth-fare," signaling that the Republicans will have quite a fight on their hands and that Democrats still don't get it that the point of reform must be growing an economy that lifts more people, not enhancing and holding onto entitlements.

According to an editorial in today's Wall Street Journal ("Tax Reform, If You Can Keep It"), the GOP plan is pro-growth but the Republicans don't have much room for maneuver. The editorial board notes:

The nine-page framework offers the contours worked out by GOP leaders and tax writers in Congress and the Trump Administration, and the goal is to lower rates and streamline preferences. The danger is that the opening offer is near the lower limits of what is needed to lift the economy to a higher growth plane, and Republicans don’t have room for concessions to this or that interest group.

The most important news is that the plan would make U.S. businesses more competitive around the globe. The corporate rate will fall to 20% from 35%, which is the highest in the developed world. This is not as low as President Trump’s floated 15% or Ireland’s 12.5% but would bring the U.S. below the industrialized-world’s 22.5% average. This would improve U.S. corporate tax competitiveness from a depressing 35th out of 35 nations in the Tax Foundation’s annual index, which is below even France.

The framework also moves to a territorial model that allows companies to pay taxes where income is earned, which is the global norm. The punishing U.S. system has left $2.5 trillion parked overseas, and that money will be invited back at a discount with illiquid assets paying a lower rate than cash. The changes will be permanent, which is important as corporations invest with a long tail, and they will be immediate, which means investors won’t have to wait to see the benefit of lower rates.

Small businesses with owners who “pass through” income to personal returns would see a top rate reduction to 25% from 39.6%. This will require some finesse, as tax writers must develop guardrails that prevent lawyers or hedge-fund operators from dumping wages into pass-throughs and paying less than salary folks. Such businesses will pay a slightly higher top rate than corporations, but the latter are taxed twice: once on income, again on dividends or capital gains.

According to the editorial board, there are some points on the reform that fall somewhat short of the ideal:

The big disappointment is in individual tax rates. The good news is the blueprint would fold seven brackets into three—12%, 25%, 35%—and double the standard deduction to $12,000 for individuals and $24,000 for married couples. The increased deduction reduces the need for carve-outs that muck up the code, and millions will be able to file on a postcard.

But the outline threatens an undefined additional rate on high earners to ensure the new code is “as least as progressive” as the current system, which sounds like a talking point from Nancy Pelosi. The top 1% paid almost 40% of all federal income taxes in 2014, according to the Tax Foundation, and these individuals are the most sensitive to tax rates in deploying their assets. Separating the personal rate from the small business rate all but guarantees that the top rate will never return to the Reagan low of 28% that has since climbed to about 44% with the ObamaCare surtax on investment income.

All of this is a bow to the class warriors on the left and right, but the punt on rates won’t spare Republicans from attacks. The left is already portraying the business tax cuts and death-tax repeal as giveaways to the rich.

The people hardest hit by the death tax are families that have built small businesses they want to pass on to the next generation.

Small businesses are major job generators, and it is hardly a sop to the rich to let them keep more money to invest in growing their businesses.

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Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.